Special Economic Zones (SEZs) have long been a cornerstone of India’s export promotion strategy, providing significant tax and procedural benefits to businesses engaged in export-oriented activities. SEZ service units such as those in IT/ITES, consultancy, research, and support services operate in a unique regulatory environment under the SEZ Act, 2005, and are intended to remain tax neutral.
With the introduction of the Goods and Services Tax (GST) regime in 2017, while the fundamental principle of zero-rating for SEZ supplies was retained, it became subject to a stricter compliance and documentation framework. Procedural rigor and evolving judicial interpretations have since shaped how these benefits are claimed and defended.
This article provides a situation-wise analysis of the GST impact on SEZ service units, alongside key judicial pronouncements that clarify ambiguities and highlight best practices.
| SITUATION | FRAMEWORK AND PRACTICAL IMPLICATIONS | JUDICIAL INSIGHT |
| Registration | Under Section 25(1) of the CGST Act (as amended), an SEZ unit or SEZ developer must obtain separate GST registration, even if they operate within the same state as their DTA unit. Rule 8(1) further clarifies that SEZ is a separate business vertical. | [Coffee Day Global Ltd. In re (2018) 69 GST 420 (AAR Maha)] emphasized separate registration for SEZ operations. |
| Letter of Undertaking | Suppliers providing zero-rated services to SEZ units (without payment of tax) must furnish LUT as per Rule 96A. This applies to Hotels/accommodation, Software services, Consultancy, legal and IT services. LUT must be renewed annually and endorsed by the jurisdictional officer | Regal Engineers & Contractors Pvt Ltd (Madras HC) held that LUT exemption allowed for construction services provided to SEZ |
| Supply by SEZ Unit to Overseas Clients
(Export Sales) |
For SEZs, Section 16 of the IGST Act provides that “Supplies to or by an SEZ unit or developer for authorized operations are zero-rated supplies, i.e., exempt from GST while retaining eligibility for ITC & refunds.”
Despite location-based PoS rules in IGST Act (e.g., Section 12(3)(c)), supplies to SEZ override and are treated as inter-State under Section 7(5)(b). Under Section 16(3) of the IGST Act & Rule 96A, suppliers to SEZ can Supply without paying IGST against an LUT/Bond Or pay IGST and claim refund later. Most businesses prefer the LUT route to avoid working capital blockage. Service contracts must clearly establish that the recipient is located outside India and that payment is received in convertible foreign currency or INR through a permitted Vostro account. |
Proceeds should be realized in convertible foreign currency or INR through permitted Vostro accounts
(Elite International, Delhi HC, 2024 upheld INR via Vostro as valid). Nokia Solutions (Karnataka HC, 2024) emphasized that delayed submission of eBRC/FIRC cannot invalidate refund claims if substantive conditions of export are met Panasonic Life Solutions (AAR Tamil Nadu) held that Supply to SEZ eligible for Zero Rated even if location of recipient is same. |
| Supply by SEZ Unit to DTA Clients
(Domestic Sales) |
When an SEZ unit provides services to a recipient located in the Domestic Tariff Area (DTA) i.e., within India it is treated as a taxable supply within India, not zero-rated.
GST is applicable, and the SEZ unit must charge IGST (as it remains an inter-State supply under Section 7(5)(b) IGST Act) and deposit the tax with the government. |
|
| DTA Supplies to SEZ Unit
(Cost for Services Procured) |
When a supplier (registered in DTA) provides services to an SEZ unit for its authorized operations, it is treated as a zero-rated inter-State supply of services under Section 16 of the IGST Act. Supplier may Provide services without payment of IGST under LUT/Bond and claim refund of ITC or Provide services on payment of IGST and claim refund of IGST paid.
As per FAQ on GST Chapter 21 Q No. 41 issued by CBI&C on 15-12-2018, SEZ unit will be liable to pay GST under reverse charge, wherever applicable. However, this view has not been accepted by AAAR. Services provided to Intermediary who in turn provided services to SEZ unit is taxable. Zero-rated supply to SEZ is a substantive right under Section 16 of the IGST Act. DTA units can supply goods and services to SEZ units/developers on payment of IGST – Notification No.5/2023-IT, dated 26-10-2023. DTA Units can make supplies to SEZ units on payment of IGST and claim refund of IGST paid. This provision is not applicable to suppliers of tobacco, pan masala or other similar products – Notification No.6/2023-IT, dated 26-10-2023. Invoice must be endorsed by SEZ officer confirming authorized operations. The objective test for zero-rating is whether the service was actually used for authorized operations minor procedural lapses like delayed endorsement cannot nullify this benefit Supplier’s invoice must mention “Supply of services to SEZ unit for authorized operations – Zero Rated.” |
Garuda Power (AAR-WB) and Sodex India (AP HC, 2025): Denial of zero-rating despite endorsed invoices was overturned endorsement by SEZ officer is sufficient.
Waaree Energies (AAR-Gujarat, 2024) & Abans Fund Manager (AAR-Gujarat, 2024): SEZ is not liable under RCM for such services if they are for authorized operations and LUT/Bond is furnished. Coffee Day Global (AAR-Karnataka) & Merit Hospitality Services (AAR-Maharashtra) it has been held that supply of beverages using coffee vending machines are not certified as authorised operations by proper officer of SEZ and hence are not ‘zero rated supply’. Vision Pro Event Managementv. CCE (2019) 365 ELT 555 (CESTAT), it was held that event management service provided to SEZ is deemedto be consumed in SEZ even if provided outside SEZ. Carnation Hotels Pvt. Ltd. (AAR Karnataka) Accommodation services provided within an SEZ for use by SEZ units or their business visitors are to be treated as services used for authorized operations, provided the SEZ unit includes such service in its Letter of Approval (LoA). Hence, such services would qualify for zero-rating under Section 16(1)(b) of the IGST Act, 2017 Gogte Infrastructure Development (AAR-Karnataka) held that Accommodation Services Supplied to Employees and guests of SEZ units outside SEZ are taxable Abans Alternative Fund Manager LLP (AAR Gujarat) Held hat Input Services used in SEZ are eligible if endorsed. Softrose Petrochemicals Private Limited (Calcutta HC) Held that Delay in endorsement not a ground to deny refund. ATC Tires Private Limited (Madras HC): The “substance over form” principle must prevail when services have actually been consumed in furtherance of authorized SEZ activities |
| Services Imported by SEZ from Overseas Suppliers | Services imported by SEZ unit or developer for authorized operations are exempt from GST – Notification No. 18/2017-IT (Rate)dated 5-7-2017. | |
| Other Services: RCM & Non-Authorized Operations | SEZ units must be cautious If services procured are unrelated to authorized operations (e.g., catering for employees, personal services), GST applies and SEZ unit may be liable under RCM
If invoice is not endorsed or not for authorized operations, GST is payable |
Portescap India (AAAR Maharashtra, 2023): SEZ unit need not pay GST under RCM for services for authorized operations covered under LUT/Bond.
Gogte Infrastructure (AAR-Karnataka): Services provided to employees (hotel accommodation) not considered authorized operations — hence taxable. |
| Rail Freight Charges | Ministry of Railways has clarified as follows vide Railway Board Letter No. TCR/1078/2017/37 dated 28-3-2018. Railways shall not charge GST on freight charges to freight charges and on demurrage/wharfage in case of supply of service of transport of goods to SEZ Unit. Railways will file LUT with tax department. | |
| Refund of Accumulated ITC | One of the most significant benefits available to SEZ service units under the GST regime is the ability to claim refunds of taxes paid or accumulated credits, thanks to the zero-rating of supplies made to or by SEZ units (for authorized operations).
For SEZs, refunds arise in two contexts:
Section 54 of CGST Act:
As per Rule 89(4) Explanation “Net ITC” means input tax credit availed on inputs and input services during the relevant period and does not include ITC on capital goods. Capital goods credit is explicitly excluded from refund, which is an important caveat to keep in mind. |
Nitrex Chemicals (Gujarat HC, 2025): Refund claim beyond 2 years was rightly denied.
Nokia Solutions (Karnataka HC, 2024): Procedural lapses like delayed eBRC/FIRC submission cannot deny substantive refund rights. Kuehne Plus Nagel (Gujarat HC, 2025): FIRC is not mandatory if forex receipt is otherwise established. Elite International (Delhi HC, 2024): Refund allowed even if proceeds were realized in INR. Urjita Electronics (Madras HC, 2025): SEZ unit can claim refund of tax paid by supplier if disclaimers from supplier are furnished. IPCA Laboratories (Gujarat HC 2022): SEZ is eligible for refund of ITC received from Input Service Distributor lying unutilized FedEx Express (Andhra Pradesh HC) held that Freight Services eligible for SEZ Refund when used for authorised operations. ATC Tires Private Limited (Madras HC): The department should not reject refund mechanically for procedural delays when the intent and usage are evident |
| Invoicing Guidelines for Supplies made by SEZ Units | An SEZ unit supplying services is exempt from mandatory e-invoicing under GST law as amended till July 2024. This exemption flows from CBIC’s Notification No. 13/2020-Central Tax, as amended, which clarifies that “an SEZ unit is excluded from the scope of e-invoicing”, even if it crosses the turnover threshold
The usual declaration on the face of the invoice is “Supply meant for export / supply to SEZ unit or SEZ developer for authorized operations on payment of IGST / under bond or LUT without payment of IGST” Further as per Notification No. 14/2022–Central Tax dated 05.07.2022 a declaration “We hereby declare that though our aggregate turnover in any preceding financial year from 2017-18 onwards is more than the aggregate turnover notified under sub-rule (4) of rule 48, we are not required to prepare an invoice in terms of the provisions of the said sub-rule” |
Conclusion:
The GST regime has retained the core benefit of zero-rating for SEZ service units, but it has introduced a new layer of procedural compliance, documentary discipline, and interpretational challenges. For service-oriented SEZs whether in IT, consulting, R&D, or professional services the key to sustaining tax efficiency lies in meticulous alignment with statutory provisions and administrative guidelines.
Judicial rulings across high courts and authorities have provided welcome clarity: from reinforcing the “substance over form” principle in refund processing to recognizing the primacy of SEZ Act provisions over conflicting GST technicalities. At the same time, they also underscore the importance of timely endorsements, correct invoicing, and the demonstrable linkage of input services with “authorized operations.”
To truly harness the benefits of GST zero-rating, SEZ service units must embrace a compliance-first approach, supported by regular audit of documentation, advance tax planning, and active monitoring of legal developments. When managed proactively, the GST framework not only safeguards tax neutrality for SEZ services but also supports India’s broader vision of export-led growth through globally competitive service hubs.
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Disclaimer: This article is intended solely for informational and academic purposes. It presents the author’s personal understanding and interpretation of the GST law as applicable to SEZ service units, supported by relevant statutory provisions and judicial pronouncements. The contents should not be construed as legal advice or relied upon for making business or tax decisions. Readers are advised to consult with professional advisors or legal counsel before taking any action based on this article. Neither the author nor the publishing platform accepts any liability for actions taken in reliance upon the content herein.
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I knew Mr. Chaitanya in-person from 2018. He is a go to person for tax filing. Very potential candidate. 👏💯